• Why Andreessen Horowitz’s Fourth Fund is Likely Around the Corner

    moneymoneymoneyYesterday, in a WSJ series on venture capitalists’ predictions for 2014, Managing Partner Scott Kupor of Andreessen Horowitz was asked if “venture capital returns have improved enough to draw renewed limited-partner interest in 2014.”

    Kupor said the question was really “whether investment dollars will continue to be concentrated in the top firms that enable them to generate above-average returns.”

    Kupor shied from saying that fundraising for Andreessen Horowitz will be a walk in the park as always, but it’s a safe bet to make. In fact, it’s likely that Andreessen Horowitz will announce its next big fund in January or very soon after. (The firm declined to comment for this story.)

    Consider, for starters, that early last week, the firm announced a new general partner, Balaji Srinivasan, who cofounded a genetic-testing company that makes a saliva-based test for more than 100 serious inheritable diseases. VCs don’t always bring in fresh GPs before a new fund raise, but it’s a little cleaner that way. And Srinivasan gives Andreessen Horowitz an even stronger case to make to investors, given his background in consumer-facing healthcare — an increasingly attractive area of investment where he bolsters Andreessen Horowitz’s expertise.

    It’s been almost two years since Andreessen Horowitz debuted two funds totaling $1.5 billion. Most venture firms raise money every three years, but that’s never been the modus operandi of Andreessen Horowitz, whose biggest bets include Skype, Twitter, Facebook, and GitHub. (Readers might recall that Andreessen Horowitz collected $300 million for its first fund in 2009, $600 million for its second fund in 2010, and a $200 million co-investment fund in 2011, before announcing its biggest funds to date – a $900 million fund with a $600 million parallel fund — in January 2012.)

    A little basic math also points to a new fund in the very near future. When I sat down with firm cofounder Marc Andreessen in mid-October, he told me then that the firm’s third fund was “about 70 percent committed.” And if you’ve been following the news, you’ll notice the firm has led a string of very big investments since.

    Yesterday, Crowdtilt, a crowdfunding platform, announced it had raised $23 million in Series B funding led by Andreessen Horowitz. Last Friday, the startup Oculus VR revealed that it had raised $75 million to more broadly market its virtual reality headset. Its lead investor: Andreessen Horowitz. And last Wednesday, Andreessen Horowitz made a giant bet on Bitcoin, leading a $25 million investment in Coinbase, a company that makes it easier to buy and sell the digital currency.

    That’s saying nothing of the smaller deals that Andreessen Horowitz has helping to fund, including Koru, a young education startup, and Doctor on Demand, a new company behind a mobile app that connects users with physicians for a consultation fee.

    For a gun-slinging firm that likes to make outsize bets when it spies the chance, that doesn’t leave a lot dry powder — especially when taking into account reserves for follow-on fundings.

    “We’ll probably raise a new fund next year,” Andreessen had told me back in October. My guess: we can expect it much sooner than later.

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  • The Part-Time VC

    Semil ShahSemil Shah has a full-time job, spending most of each week doing mobile product marketing for a company called Swell in Palo Alto. The rest of the time, Shah is either writing a weekly column for TechCrunch; working as an informal (but paid) mobile technology consultant to several Sand Hill Road firms; or trying to participate in competitive seed-stage financings using a $1 million fund called Haystack that he raised last year.

    Shah — who has so far backed 16 companies and is beginning to think about a $5 million to $10 million second fund – calls his schedule “not normal.” However unusual it may be, Shah could well represent the future of early-stage investing given its ongoing atomization. I talked with him about his immediate plans over coffee last week. Our conversation has been edited for length.

    How does someone with a.) a regular job and b.) no investing track record raise a million dollars?

    I’ve always been interested in investing and basically wanted to get practice, so I turned to [VCs and founders] who I know for help. There’s a ton of trust involved and every LP is different. Even just getting a $25,000 LP check from someone who has the means isn’t easy. But I think people knew that I wanted to do it and was having a hard time, and [eventually] I sort of passed the passion test. I also invested some of my own money [in the pool] and didn’t charge a management fee.

    How has it been going?

    I’ve now invested in 16 startups across four areas, including marketplaces, core infrastructure, online and offline commerce logistics, and mobile computing. Quite a few are doing well, including Hired [which marries tech talent with jobs]; Paddle8 [a virtual art auction house that has already gone on to raise a Series B round] and Instacart [a same-day delivery grocery startup that counts Sequoia Capital’s Mike Moritz as a board member].

    What size checks are you writing, and what are you getting in return for them?

    I can write between checks of between $25,000 and $100,000, though they’ve usually been around $25,000. And as someone on the edge of these deals, you aren’t setting the terms; you’re asking to be in the deal. For me, you take what you can get. It’s very competitive; I was surprised by how competitive it is.

    How are you selling yourself to sought-after entrepreneurs?

    I do think that by working full-time in mobile, I connect better with entrepreneurs because my operational knowledge is sharper. I also tell everyone my terms of engagement, which are that I’m on call for the entrepreneurs. I let them know that I think [they’ll] figure out what they need to do, then to call me if I can help in a certain area or just to talk to, because I’m not one of the big players. I kind of underpromise and try to be helpful and available, rather than say, “I’m going to do all these awesome things for you.”

    For those who might like to do what you’re doing, how would you advise them to separate themselves from the pack?

    I think firms and individuals have to brand themselves because it’s so competitive, and there are three ways to do it: there’s content marketing, including through blogs and social media; there’s referral marketing – you work with someone and give them an amazing reference; and there’s performance marketing. At the beginning, what do you do? You media market to gain exposure. Either way, entrepreneurs are smart; they figure out [who adds value and who doesn’t].

    Any big surprises now that you’re so entrenched in the market? What trends are you seeing?

    There are a lot of companies coming out of Y Combinator and [other high-profile incubators] that are getting fancy with terms and trying to get cute with the caps, and the market doesn’t really bear that out. I think sometimes with first-time founders, you get into the game, and you just get caught up in everything.

    I think another thing that most people on the founding side don’t understand is the exit profile of most companies. There’s a $20 million to $50 million band, and a $50 million to $100 million band, then the curve just drops. Entrepreneurs and investors publicly say, “Oh, we’re not going to talk about exits,” but everyone is silently making their own exit profile when they’re considering making an investment.

    Do you think when the time comes to raise a second fund, investors will be ready to bet on you again?

    I hope so. I’ve gotten lot of inbound [deal flow] from my other deals. I feel like I’ve passed the trust threshold and also the he-got-into-early deals threshold. I want to be investing in private, early-stage technology for the rest of my life.

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  • Meet the VC Who Single-Handedly Raised $150 Million from Investors

    Rami's photoIn all likelihood, you’ve never heard of Rami Elkhatib. He isn’t Twitter-famous. He seldom speaks with reporters. He hasn’t worked at a brand-name firm. Before launching Acero Capital on Sand Hill Road in 2010, Elkhatib quietly represented the Raleigh, N.C.-based venture firm Southeast Technology Funds, where he worked as a West Coast-based general partner for roughly eight years.

    But while Elkhatib may be a stranger to you, enough institutional investors know him — and apparently think quite highly of him – that they committed $150 million to his debut fund in 2010, where he was (and remains) the sole general partner. 

    Earlier this week, I caught up with Elkhatib, whose hits include the 2006 sale of Pixel Magic to Dai Nippon and the 2007 sale of the managed storage solution company Arsenal Digital to IBM. Our conversation has been edited for length.

    You’ve been investing this fund since 2010. What are you shopping for, and how many startups have you backed?

    The fund closed in 2010, but it’s still pretty early. We’ve made six investments, and the plan is to make 20 or so. As for focus, it’s on Enterprise IT broadly. We’ll probably invest in up to 18 [related] companies, along with a couple outside that space. Within Enterprise IT, the approach is to look at what enterprises are interested in, and for us, right now, that focus translates into analytics, mobility, infrastructure, and virtualization.

    How big are the bets that you’re making?

    We tend to be pretty agnostic: we’re focused more on the opportunity and the management team, but the investments we’ve made so far have been A or B rounds in the $4 million to $6 million range, with reserves set aside [for follow-on fundings].

    What themes are interesting to you right now?

    Enterprise mobility is an area I’m really interested in. There’s still a lot of room for innovation; I’m personally focused on finding mobility middleware – the equivalent of systems management companies from the traditional IT space.

    We’re also very interested in real-time data, meaning true real-time. When people talk about real-time in big data, they’re talking about minutes, but I think we’re moving to a world where real-time insights come in milliseconds, where data that’s going through the network hasn’t even been stored yet.

    You say “we.” Explain to readers how Acero works. You rely on “venture consultants,” which seems like a new twist on things.

    Well, I’m the sole GP, but I’m not the only person. We [including an associate and venture partner] have a corporate, enterprise-focused sourcing strategy, meaning that for every subsector, our approach is to cultivate very strong relationships with large public platform companies in that sector, and we use those relationships to decide [what themes to pursue]. Toward that end, we have venture consultants with us who happen to be senior VPs in product management at platform companies [who we] talk with about their needs or, if we are interested in, say, the storage space, we make it our job to talk with them about where they see the market headed.

    It’s not a casual effort. It’s the cornerstone of how we’ve been sourcing deals.

    Have you modeled these scouts after another firm?

    I’ve modeled it more on my own experience within Toyota and Procter & Gamble, where I spent the first third of my career as a software engineer focused on database design – an early ’90s version of big data. If anyone back then had wanted to talk about how you collect information about every [stock-keeping unit] in every store in the United States, and how you do trend analysis on that, there was probably no one better to talk with than my team.

    Are these consultants compensated?

    They are, though I’d rather not get into specifics. Ultimately, I hope that it will become a recruiting strategy. There are three to five people who have worked for us in that capacity, and I’m sure our next partner will be one of those people. It’s very challenging to add someone new to a team; I think [our way of interacting with these individuals] is a good way to get to know them.

    I’ve never heard of a single-GP firm managing so much money. Will you hire another GP shortly?

    We’ll be adding a principal and an associate … but I think it will take more time to add a GP. I don’t have it calendared. Partly, that’s because we just made our sixth investment [leading the $11 million Series B round of Gridstore, a startup that makes low-cost storage devices] the same week we sold one portfolio company [Bitzer Mobile, a company that makes mobile applications management software and that Oracle acquired in the middle of last month for undisclosed terms; Acero had led its lone, $4.83 round in 2011, joined by Chevron Technology Ventures]. So net net, my board commitments didn’t increase.

    If you start a fund with one or two or three GPs, it almost always takes a long time. Whoever starts the fund needs to establish its personality and approach and strategy. After that, you can add GPs.

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  • Seed-Stage LP Cendana Capital Looks to Raise $55M

    michael_kim_DV_20110104201014Cendana Investments, the San Francisco-based investment firm, has filed two Form Ds, for Cendana Capital II, LP and Cendana Investments, LP, with respective targets of $30 million and $25 million. (The forms are here and here.)

    Four-year-old Cendana has made a name for itself by backing so-called micro funds, including Freestyle Capital, IA Ventures, K9 Ventures, Lerer Ventures, and SoftTech VC. According to a source familiar with the firm’s thinking, Cendana Capital II, the $30 million vehicle, will continue to make investments in seed-stage-focused venture funds —  adding to roughly $90 million that the firm is already managing toward that end.

    Cendana’s first fund was a $28.5 million pool. It later raised a $60 million co-investment fund that Cendana manages with UTIMCO, called the Cendana Co-Investment Fund.

    In a new twist, Cendana is moving away from being strictly a fund of funds. The second fund that Cendana is now raising, — Cendana Investments, which is targeting $25 million — will make direct investments in startups.

    Cendana has yet to raise money for either of its newest funds, according to the filings.

    Cendana was founded by Michael Kim, who was among one of the original partners of Rustic Canyon Ventures, where he spent nearly a decade. Before joining Rustic Canyon, Kim spent about two-and-a-half years as an investment banker at Morgan Stanley.

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  • In VC, Going it Alone, with Plenty of Company

    standing aloneA growing number of venture firms have been springing up around a single general partner, including PivotNorth, led by Tim Connors; Acero Capital, led by Rami Elkhatib; Cowboy Ventures, led by Aileen Lee; and K9 Ventures, led by Manu Kumar. 

    Now add to the list Cindy Padnos, the lone GP of Illuminate Ventures, an Oakland, Calif.-based outfit that is today announcing a new, enterprise-focused, $20 million fund. In a call on Monday, Padnos said she was able to raise the new pool after investing a “few million dollars” in an earlier, proof-of-concept “Spotlight Fund” that has taken off.

    Two of Spotlight’s five portfolio companies have been acquired: 3D game design platform Wild Pockets was purchased by Autodesk in 2010, and data and audience management platform Red Aril was acquired in 2011 by Hearst Corporation. (Terms of both deals remain private.) Meanwhile, the fund’s three other portfolio companies have been marked up considerably since Padnos invested. Among them: the SEO management platform company BrightEdge, which Illuminate backed as a Series A investor; the startup has gone on to raise nearly $62 million altogether, including from Battery Ventures, Intel Capital, and Insight Venture Partners.

    Padnos – a Booz, Allen consultant turned operator turned venture capitalist – gives a lot of credit for her success thus far to a venture partner in Seattle and an advisory counsel of roughly 40 people whom she has assembled over the years.

    She also believes she has struck on a strategy that clicks in a today’s market, investing in enterprise startups that are bootstrapped or angel financed but not quite ready for a large-scale Series A rounds.

    Indeed, Padnos — who says her “sweet spot” is writing initial checks of $500,000 as part of $1 million to $3 million rounds — has already made several new investments out of her new fund: Hoopla, a company that makes “workplace gamification” software; Influitive, a marketing company that analyzes data around social media; and Opsmatic, the newest startup by former Digg CEO Jay Adelson.

    Asked whether she is seeing any particularly interesting trends, Padnos tells me she’s most closely watching the “whole world of enterprise mobile.”

    But the growing group of single-founder firms that Illuminate has joined is fairly interesting, too.

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  • Atomico Raises $476.6 Million for Third Fund

    logoAtomico, the U.K.-based venture firm that has expanded into numerous countries in recent years, has closed its third fund with $476.6 million, a new SEC filing shows. The firm began raising the capital in October 2012.

    Seven-year-old Atomico was founded by Skype co-founder Niklas Zennstrom to (mostly) seek out investments in non U.S.-based startups. Among its portfolio companies is the three-year-old, Berlin-based task management app developer 6Wunderkinder, which just closed on $30 million in new funding led by Sequoia Capital. (The deal marked Sequoia’s first investment in Germany.)

    In 2011, Atomico also participated in the $42 million Series A round of the 10-year-old Finnish game maker Rovio, of the Angry Birds franchise. It’s the only funding that Rovio has publicly disclosed to date.

    Atomico presumably saw a very nice return last month, when the Climate Corporation was acquired by Monsanto for roughly $1 billion. Climate Corporation helped its agribusiness customers predict crop yields using big data to examine soil quality, historical rainfall and more. Altogether, Climate Corporation had raised $109 million, and Atomico was there from the beginning, leading its $4.3 million angel round in 2007 with Index Ventures.

    Atomico has offices in São Paulo, Beijing and Istanbul, and  Tokyo. It closed its second, $165 million, fund in 2010.

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  • Former Sequoia Partner Mark Kvamme at Center of Controversy Again

    Kvamme,Mark-304Mark Kvamme, a former partner at Sequoia Capital, has cultivated numerous fans since moving to Ohio in early 2011. But he has also attracted critics who worry that his relationships with some of Ohio’s biggest power brokers are a little too cozy.

    In the latest controversy, press reports on Friday revealed that Drive Capital, Kvamme’s new, Columbus-based venture firm, received a $50 million commitment from Ohio State University several months ago despite concerns that the fund is unproven.

    As of early August, Drive Capital had raised $181 million for its debut fund, which is targeting $300 million. Kvamme’s sole partner in the endeavor is Chris Olsen, also formerly of Sequoia Capital.

    Kvamme did not respond to a request for comment over the weekend. Ohio State officials also did not respond to requests for information.

    Records released on Friday to the Associated Press and Cleveland’s Plain Dealer newspaper show that university officials were pushing back against the school’s investment in Drive Capital until April, over concerns that the firm’s Midwest investing thesis was based on “the attractiveness of what is perceived as an underserved market” rather than proof of concept.

    An email on April 5 from Ohio State’s chief investment officer, Jonathan Hook, to the school’s chief financial officer, Geoff Chatas, shows Hook told Kvamme directly that the school’s officials “did not see his fund as a good investment.” Later emails show that between April and July, when the investment was made, Kvamme and his wife, Megan, dined with then-president of Ohio State, Gordon Gee, during which time Kvamme seems to have secured a verbal commitment from Gee.

    “Your thoughtful questions, insightful comments, and sense of humor always give us food for thought accompanied by the delicious meal,” Kvamme wrote Gee in an email dated May 15. “We also always come away from our dinners with more ideas on how we can make Ohio the center of innovation and creativity.”

    In his email, Kvamme also asked Gee to approach other major universities for funding commitments, including the University of Michigan, Indiana University, and the University of Wisconsin.

    Gee replied to Kvamme that he would “see how we can best get other institutions to join with us.”

    Joseph Alutto, who succeeded Gee as the school’s interim president in July, had also questioned the size of the investment that Ohio State was planning to make in Drive Capital in the weeks before Alutto took his new office. Writing to Chatas in June, Alutto asked: “What is the justification for a $50 million investment rather than one in the $20-30 million range you had described as more typical? Let’s discuss.”

    Several weeks later, in an email to Chatas signed by “G,” the sender wrote that he had convinced Alutto to “honor the Kvamme agreement,” adding, “We are back on solid ground. Make that happen quickly.” (The name and email address of “G” were redacted by OSU when it submitted the emails to the media.)

    Venture capital is very much a relationship-driven business, of course. And surely, Kvamme looks as good a bet as any. Kvamme led Sequoia’s early investment in LinkedIn – a bet that has paid off handsomely for Sequoia’s LPs. Kvamme also borders on VC royalty. His father, Floyd, is a partner emeritus at Kleiner Perkins, and his ex-father-in-law is famed venture capitalist Pierre Lamond, long one of Sequoia Capital’s most powerful partners.

    Still, the investment appears to represent the largest commitment to a venture firm that Ohio State has made. Venture capital investments represented just 0.7 percent, or $21.7 million, of the $3.1 billion that the university was managing as of June 30.

    The agreement is also attracting scrutiny as Gee has reportedly been seeking an investment from Kvamme. According to the emails provided to news outlets on Friday, Gee, who remains at Ohio State in an emeritus position and as a law professor, talked about soliciting a $1.5 million contribution from Kvamme to help establish a higher-education policy center.

    An OSU spokeswoman told the Plain Dealer that it’s “important to note that exchanges about Mr. Kvamme as a possible donor took place well after the investment was made, and on the Center in particular, Gordon did not even know about the idea for such an institute at the time he started advocating for the investment opportunity.”

    Combined with school officials’ apparent change of heart, the “huge departure” for the university has critics like Brian Rothenberg, the executive director of the public interest group ProgressOhio in Columbus, concerned.

    “Mark Kvamme seems to have a very inquisitive mind and he doesn’t mind pushing the envelope, but it’s a toxic mix with public money,” says Rothenberg.

    Rothenberg has been focused on Kvamme’s activities for some time. In fact, ProgressOhio is challenging the constitutionality of JobsOhio, a private nonprofit that Ohio Governor John Kasich created with Kvamme’s help in January 2011. Gee joined the board six months later.

    The job, which brought Kvamme to Ohio from Silicon Valley, was expected to last just five months. But by August 2011, Kvamme had acquired an Ohio’s driver’s license, along with a farm outside Sunbury, Ohio. Apparently, he had also fallen in love. (Kvamme is now married to the daughter of Greg Browning, the former director of the Ohio Office of Budget and Management.)

    In 2011, Kvamme said he hoped to create 30,000 new Ohio jobs through JobsOhio. But from the outset, the program, which manages roughly $100 million per year, has operated under a shroud of secrecy. (The bill that created JobsOhio states that “records created or received by JobsOhio are not public records.”)

    ProgressOhio and others have characterized that lack of transparency as unconstitutional. The Supreme Court of Ohio will begin hearing oral arguments relating to the case this Wednesday.

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  • True Ventures on Spotting Winning Teams

    true-ventures_fullSince its 2005 founding, San Francisco-based True Ventures has been making seed-stage bets on startups, with an eye toward plugging up to $10 million into those that break out. 

    The firm’s strategy has worked with aplomb. True was the first investor in WordPress parent Automattic — one of the tech industry’s hottest private companies. True also wrote early, small checks to the video ad network Brightroll and the wearable device maker Fitbit, companies that have gone on to raise tens of millions of dollars from eager follow-on investors. I recently caught up with cofounder Jon Callaghan to discuss True’s model, how to know when a startup is souring, and what kinds of companies the firm is backing right now. Our conversation has been lightly edited for length.

    True typically gets 20 percent of a company in return for a fairly small first check of $1 million to $2 million. How do you do it?

    We’re investing a $200 million fund, so $1 million checks are half of one percent of the fund. If you think about that allocation, it lets us take on an incredible amount of risk. When things work, we have a large enough fund that we can support [the best investments] with $5 million or $10 million – and we do have $10 million in lots of companies. [With] our best companies, we’re the largest shareholder on the lowest cost basis because we were in there on day one.

    Some of your founders have enjoyed success before and could presumably sell 20 percent of their company for a bigger check. Why don’t they?

    We wouldn’t be doing them any favors by putting too much money in too soon. We’re actually much more aligned by saying, “Here’s $1 million to $2 million to take you through the next 18 to 24 months [to see if your idea works]. Is that worth 20 percent to you?” And it is. It’s a pretty good trade.

    When you write a bigger check, you also start bumping into loss aversion. You really don’t want to lose that first check. If you’re in too heavy in the beginning, it’s really scary for any investor. And the last thing that any creative founder needs is a nervous investor.

    True has now backed 120 companies. When do you know that you have a great team on your hands, and when do you know a startup is going south?

    We like to see a constant thread through [founders’] experiences, meaning that when we hear their story, it’s really clear why they’re doing a particular company. We backed [former Wired editor] Chris Anderson [who founded the unmanned aerial vehicle company 3D Robotics last year] knowing there were a number of threads that led him to his company: his fascination with innovation; his kids’ curiosity in hacking Legos with remote control airplanes; and finally, just knowing that there’s nothing else in the world he’d rather be doing – and this is someone who could be doing anything.

    When it comes to the downside, there are a lot of easy tells. Communication gets weird between a founder and the rest of the team. Things just don’t add up. When teams are in flow, you can see it and feel it. Their offices are alive with energy. Those are the good ones. If you spend time at a company and there’s not that energy, then you kind of have to say, “What’s going on here?” It’s usually because some basic stuff is missing. People aren’t on board the mission, or the founder or someone else took the product in a direction that isn’t really resonating with the rest of the team, or the team kind of didn’t have the trust required to get together in the beginning.

    True first went after consumer Web companies, then SaaS companies, then infrastructure companies. What does your newest crop of portfolio companies look like?

    We think this wave of software and mobile innovation will disrupt very large existing businesses. Hair color is one of two consumer packaged goods companies that we’ve done. In robotics, we’ve funded many interesting and wearable robotics companies that haven’t yet been announced. We now have one of the largest device and wearable portfolios that no one knows about. We also think the car industry, where there’s clearly a huge software opportunity, is really interesting.

    It’s a big, scary market, and traditionally you might say, “What? You want to sell to automakers?” But we think there’s a really brilliant team doing something very bold and audacious, and we can and want to take a ton of risk with that first check.

    (To read a previously published segment of our chat with Callaghan, on the “Series B Crunch,” click here.) 

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  • True Ventures’ Jon Callaghan on the Series B Crunch

    JDCHeadshot1Late last week, I visited Jon Callaghan, a cofounder of eight-year-old True Ventures, a firm that makes seed-stage investments in companies that it can afford to back for the long haul. The firm’s string of hits includes the book recommendation site Goodreads, which raised $2.75 million and sold to Amazon this year for $150 million; 3D printing company Makerbot Industries, which raised $10 million and sold to Stratasys this year for $403 million in stock; and Automattic, the still-private parent company of WordPress. At True’s San Francisco offices, surrounded by a sea of glass windows and polished wood floors, Callaghan shared his views on a number of things, from the firm’s operations to the democratization of startup capital. We’ll feature more of that interview in StrictlyVC this week; what follows is a part of our discussion that centered on the growing shortage of Series B funding for startups.

    Years ago, you told me that True only does its own follow-on rounds, meaning in companies it has already backed. Has the firm reconsidered that stance, given that fewer and fewer firms are focused on Series B size investments? You’re investing a $200 million fund. Meanwhile, it seems like an underserved market.

    It’s a really interesting part of the market. We’re not building a new product for that market. It’s not in front of us right now, though I personally think about how we can solve the needs of great entrepreneurs, and that’s a big, huge problem in the ecosystem right now.

    What’s creating this bottleneck, in your view? 

    There are definitely too many seed-funded companies. But I think it goes back to risk. I don’t think the normal venture capital model is designed to take extremely large product/market risks. What that means is when companies get through the A [round] to the B and they still have big unanswered questions around product/market, it’s really hard for the normal industry to fund that.

    What would you do that’s not being done?

    You make sure that [the size of] your investments are relative to your [overall] fund [size] and you embrace the idea of investment failure as part of the model.

    Other VCs will accuse you of being patronizing. They’ll say that failure and risk are very much part of their models. What are you suggesting that’s different?

    Well, we’re talking about a big gap in the market – B rounds – and the reason those rounds aren’t getting funded is [the startups don’t have] enough traction.

    For the most part, the industry has gravitated toward strong, traction proof points because that’s a good business. Put $5 million or $20 million into a business that’s working and write it up? That’s a fantastic business. But it’s different than taking high risks on B rounds. So to your point, I think there’s a product to be built that’s structured around taking high risk in B rounds.

    If True Ventures were to do it, what would it look like?

    I think there’s probably a $3 million to $5 million B round product to be built that’s sort of in the $15 million to $20 million pre [valuation] range, and in order to do that you’d need a fund large enough to have follow-on capital for each of those. You can run the math. Thirty to 40 companies [in the portfolio] would be pretty optimal.

    I think it’s a really interesting slice of the industry, and it’s not rational for Sand Hill Road to come down and do it because [those investors already] have a really good model. There are some funds out there that are really well-equipped to do this and do a phenomenal job, including Foundry Group and Spark Capital — they embrace really big product and market risks. But [most] VCs will fund B and C rounds for things that have product/market fit and traction.

    Those are good companies, too. But there are an awful lot of companies that get through A rounds that don’t have all of those things and shouldn’t die or go away.

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  • Homebrew Separates Itself from the Pack

    Hunter WalkThis summer, yet another San Francisco-based, seed-stage venture fund was formed. Called Homebrew, the firm’s cofounders are Hunter Walk, who spent much of the previous decade working as a product manager at Google, and Satya Patel, who has bounded between operating and investing roles over the last 15 years, including most recently at Twitter, Battery Ventures, and Google, where he met Walk. The two began fundraising in January; they closed the fund with $35 million in late April and made the news official in July.

    Whether the firm can compete in what is an increasingly crowded part of the startup ecosystem is another story. Not only does Homebrew have many hundreds of angel investors and dozens of other seed-stage firms as competitors on deals, but it also has to contend with AngelList’s month-old Syndicates program, which enables angel investors to quickly mobilize a group of investors to back a deal.

    Homebrew’s timing might look lousy, but it will make sense over time, suggests Walk, who argues that there are still unexploited niches in seed funding.

    For starters, Homebrew is looking to lead or co-lead syndicates with initial checks of $500,000 to $800,000 as a part of an institutional round that’s between $1.25 million to $2.5 million. “There’s a lot of money from talented people who want to invest between $50,000 and $250,000 in companies, but a small number who want to step up and lead these rounds before there’s much data to crunch,” says Walk.

    Homebrew expects to back 20 to 25 startups with its first fund, and it intends to own 10 to 15 percent of each company for its efforts.

    Walk says Homebrew’s investment principles also set the firm apart. One of these is its focus on startups that level the playing field for individuals and small businesses. As an example, Walk points to Twilio, a service that helps developers build apps for text messaging and other services on phones. (Homebrew is not an investor.) Walk also highlights Plaid, a startup whose goal is to make it easier for developers to build financial applications. (Plaid recently raised $2.8 million from Spark Capital, Google Ventures, NEA, Felicis Ventures and Homebrew.)

    I ask Walk about the far bigger need in the market for Series B funding. After all, it often seems that there are too few funds to accommodate the many seed- and early-stage companies that are looking for follow-on investments. Does Homebrew risk watching its seed-stage deals fall off a cliff?

    Walk says Homebrew raised money from four institutional investors partly with that issue in mind. If Homebrew needs to raise more money to support its existing portfolio (à la the new Clover Fund of Felicis Ventures), it already has relationships with people in the business of writing big checks.

    Another point of differentiation with other seed funds? Walk says Homebrew’s startups (it has backed six so far) have solid business models involving monthly recurring subscriptions and transaction-based fees. While no guarantee of success, Walk figures this focus on revenue might help his companies’ chances of raising money from Series A and B investors when they go to market.

    “We didn’t pick ‘revenue-first businesses’ to time the market, or because we think they’re more fundable,” adds Walk. “But the type of companies we back do have clearer investment and exit paths.”

    Photo of Hunter Walk courtesy of Pinar Ozger.

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